RBI’s new group exposure norms hit global banks

Mumbai: The Reserve Bank of India’s new group exposure norms have hit international banks as they have restricted the exposure the banks take with their headquarters, impacting their business in the country. The new norms, which came into effect from April, take into account both on and off-balance sheet exposures included in either the banking or trading book and instruments with counter-party credit risk.

They have hence restricted the amount of extra dollars these banks could park with their headquarters and could impact the hedging operations of local companies that depend on them to cover their foreign currency exposure.

“The new norms take into account even guarantees which are issued by banks to foreign companies doing business in India,” treasury head at a large Anglo-Asian bank said, requesting anonymity. “For example, Siemens would need a local guarantee while working on the metro project, which they would request from their headquarters in Frankfurt and would be drawn on our bank through our head offices. Even these exposures are being counted as the local exposure, which can freeze business.”

Foreign banks have written to the RBI to consider taking their exposure to their head offices outside the purview of the so-called large exposure framework (LEF), arguing that the new restrictions could alter the balance in the market.

“The new rules take into account exposures on a gross basis. More importantly, these exposures cannot be set off with the head office,” said Jayesh Mehta, country treasurer at Bank of America-Merrill Lynch.

Under the new rule, the quantum of exposure a bank can have on another bank is linked to its capital. Before this rule, the banks used to park their excess dollars with their head offices abroad, which is now not possible.

The RBI move is in line with international norms, which have linked bank lending to their capital. Bringing in overseas exposures is also an attempt by the RBI to ring fence its India exposure to the capital it is ready to put in the country. “This is in line with international norms. Bank exposure is now linked to their tier-1 capital and they need to put more capital in case they want to increase their exposure to the country,” said Kuntal Sur, partner-financial risk and regulatory leader at PwC.

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